The Bank of England are meeting on Thursday, but we're not expecting any change to interest rates or to the quantitative easing package.

The technical outlook is still skewed in the Rand's favour. We say that on the basis that the 13.50 level has repeatedly blocked the pound over the last few months, even after the late October rally which saw the exchange rate surge from 11.55 lows. We have now given back most of those gains, and with risk appetite on the increase again, and even a sharp fall in gold seeming to have little effect, we can only suppose that the under current still favours a stronger rand. For that reason we continue to advocate a cautious approach for Rand buyers, suggesting that you cover at least half of any requirement at current levels, and consider using a protective stop order on the balance.

Sterling enjoyed a strong rally into the end of last week after bullish comments from Bank of England policy maker Paul Fisher noting that quantitative easing is working well. The scene was already set for some sort of rebound after better than expected UK jobless figures, but the Fisher comments sparked a full blown "short squeeze" on Thursday morning. A short squeeze happens when speculators who have sold the pound in expectation of further declines are forced to re-buy the currency to close their bets and stem losses. This situation can develop with little warning when large numbers of traders are caught "offside" when a market turns unexpectedly. The Sterling Rand rate moved from 11.55 up to 12.00 in two days, erasing the previous seven days' losses. However, it's too early to suggest that this signals a turning point. Against a backdrop of strong commodity prices (in particular gold which continues to trade near all time highs) it is difficult to bet against the Rand when South Africa is the world's largest gold producer.

There is still some debate over whether the Bank of England may extend so called "QE" at the November meeting, but traders will be focussing on Wednesday's release of the October meeting minutes to get a real view of how that debate is looking inside the nine member Monetary Policy Committee.

The technical outlook remains negative. The trend is still clearly down, and recent months have been characterised by gradual declines punctuated by short sharp rallies. This latest rally looks the same as previous ones, and it would take a break above 12.36 to end the series of lower highs and actually call the down trend into doubt.

Sterling fell again yesterday after an unexpected decline in manufacturing during August. Output fell 1.9%, the steepest decline since January. Analysts had been expecting a small rise.

Sentiment towards the pound had improved marginally last week as traders started to look forward to this month's Bank of England meeting this Thursday, with the all important quantitative easing package expected to remain on hold at £175bn; but that was overshadowed by the expectation that there may be an extension in November, leaving a cloud hanging over the market in the meantime making it difficult for sterling to stage any sustainable rally. Data flow was mixed. The IMF upgraded its 2010 growth forecast for the UK (to 0.9% from 0.2%), but soft manufacturing data for September surprised to the downside as market watchers expected better figures off the back of higher exports. The CBI's retail sales figure was better than expected, and the final revision to Q2 GDP saw an improvement to - 0.6% from previously published -0.8%.

The commodity currencies have an extra tail wind this week. Gold is soaring to all time highs today (currently $1040 per ounce), and oil is also being dragged higher. South Africa being the largest gold producer in the world, that gives the Rand a further boost and is helping the currency surge higher against the weak pound. We are now testing the recent low at 11.75. Sterling has broken new lows against other commodity currencies in the last few days, so there is no reason to think that we won't see this exchange rate trade even lower.

In our recent update we advocated covering any exposure at 12.50. That looks to have been sound advice as the market has now deteriorated towards the 12.00 mark.

Things were starting to look better for Sterling late last week as the latest Bank of England decision reassured investors. The lack of any further quantitative easing ("QE") gave traders a reason to buy the pound for once. Unfortunately that reason was removed this week as BoE governor Mervyn King gave another gloomy update in his quarterly inflation report. Labelling the durability of the recovery as "highly uncertain", he indicated that further easing could be in the pipeline. Inflation figures for August were slightly higher than expected, but this failed to offset the comments.

The Rand is still well bid as gold prices continue to soar above the $1,000 an ounce mark. Following this week's inflation report and sterling's reaction, there is nothing to give us any confidence in a near term revival for the pound, do we continue to advocate a cautious approach if you have Rand requirements.

In a recent update we noted the relative weakness of the Rand compared to other so called "commodity currencies". That divergence has now corrected, and we are testing the 2009 lows at 12.35. The fact that we've broken below the June/July low at 12.65 is not good news for sterling. A break of 12.35 would cause further damage to the technical outlook. This is one of the most volatile currencies we deal in, and for that reason we are advising clients with Rand requirements to consider covering any exposure here to avoid the risk of further downside.